Investments
Medium Test
Medium Test
Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.
a. investors share of the book value of the investee
b. fair market value of the investment
c. original cost of investment plus dividends received
d. original cost of the investment plus losses generated by the company
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a. receiving dividends
b. profits earned by the investee
c. losses earned by the investee
d. appreciation in market value
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a. decrease to net income
b. increase to unrealized holding gain – IS
c. increase to other revenues
d. decrease to the investment value
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a. dividends received plus the change in market value during the period
b. the cumulative change in market value
c. the cumulative change in market value less dividends received
d. the profits or losses of the company invested in
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a. bonds the investor intends to hold for more than one year
b. equities that management intends to hold until maturity
c. any security held for a minimum of one year
d. bonds the investor intends to hold until the repayment date
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a. held to maturity
b. trading
c. available for sale
d. all of the above
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a. a debit to the unrealized holding gain/loss account
b. a debit to the fair value adjustment account
c. both a. & b.
d. an increase to the unrealized holding gain – OE account
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a. the level of significant influence
b. if the security is held long term or short term
c. the amount paid for the investment
d. the industry the investee operates in
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a. long-term investments
b. current assets
c. other assets
d. tangible assets
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a. trading
b. available for sale
c. held to maturity
d. equity method securities
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Old Corp. was purchased at a cost of $10 per share for 5,000 shares
New Corp. was purchased at a cost of $25 per share for 10,000 shares
Fair market prices (bid ask quote) at the end of each year were:
End of 1st year | End of 2nd year | Dividends paid each year per share | |
Old | $11 | $15 | $1 |
New | $27 | $22 | $3 |
Determine the line items and amounts the company will report on the income statement and balance sheet given there is no significant influence.
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Income Statement | 1st Year | 2nd Year |
Old | 5,000 | 20,000 |
New | 20,000 | (50,000) |
25,000 | (35,000) Unrealized Holding G/L | |
Old Dividend | 5,000 | 5,000 |
New Dividend | 30,000 | 30,000 |
35,000 | 35,000 Dividend Income | |
Balance Sheet- investment at fair market value: | ||
Old | 55,000 | 75,000 |
New | 270,000 | 220,000 |
325,000 | 295,000 L/T Invesment |
L/T Investment 60,000
Investment Revenue 60,000
Cash 6,000
L/T Investment 6,000
L/T Investment 3,000
Investment Revenue 3,000
A. What method was used to account for the investment
B. What % ownership does the company own?
C. What was the total dividend paid by the company?
D. What was the difference in Book Value and Fair Market Value of the building at the time of purchase? Was book value or fair market value higher?
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B. Look at the entry that records the share of profits and determine what % of total income was recorded.
$60,000 / $200,000 = 30% ownership
revenue profits
C. $6,000 recorded / 30% owned = $20,000 total dividend paid.
The company received 30% of total dividends paid because they owned 30% of the company
D. The third entry represents the elimination of the difference in fair market value and book value on the date of purchase.
The formula for determining the amount is:
FMV – BV x % purchased / useful life = amount eliminated annually
$ ?? x 30% = $?? / 30 years = $3,000
$300,000 x 30% = $90,000 / 30 years = $3,000
The investment increased; therefore, the fair market value was lower than book value at the time of purchase.
Stocks | Bonds (AFS) | Equity 30% owned | |
Cost | $50,000 | $150,000 | $500,000 |
Market | $60,000 | $120,000 | $600,000 |
Total investee’s net income | $100,000 | ||
Dividend’s received | $3,000 | $10,000 | |
Interest received | $4,000 |
A. Record all journal entries related to the investments for the investor.
B. What will the investor report on the balance sheet and income statement on December 31st of the first year of operations? Give account names and amounts.
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Fair Value Adjustment 10,000
Unrealized Holding G/L – IS 10,000
Bonds held LT:
Unrealized Holding G/L – OE 30,000
Fair Value Adjustment 30,000
Income:
Cash 7,000
Dividend Income 3,000
Interest Income 4,000
Equity Method (30% owned gives significant influence):
Investment 30,000
Investment Revenue 30,000
($100,000 x 30%)
Cash 10,000
Investment 10,000
(Total investee paid x 30%)
B. Balance Sheet:
S/T Investments | 60,000 at FMV |
L/T Investments | 120,000 FMV |
L/T Equity Investments | 520,000 (500,000 + 30,000 – 10,000) |
Unrealized Holding G/L – OE | (30,000) bonds only |
Income Statement: | |
Unrealized Gain/(Loss) | 10,000 |
Dividend Income | 3,000 |
Interest Income | 4,000 |
Investment Revenue | 30,000 |
Year 1 | Year 2 | |
Net Income | 100,000 | 150,000 |
Dividends Paid | 5,000 | 6,000 |
FMV > BV (10 year life) | 80,000 | |
FMV of stock price 12/31 | $22 | $25 |
A. Record the entries for the investment in Twilight, Inc. for year 1.
B. Record the entries for the investment in Twilight, Inc. for year 2.
C. State the accounts and amounts the investor will report on the balance sheet for year 2.
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Fair Value Adjustment 20,000
Unrealized Holding G/L – IS 20,000
Cash 500
Dividend Income 500
(10% x total dividends of $5,000)
B. Year 2:
Fair Value Adjustment 30,000
Unrealized Holding G/L – IS 30,000
Cash 600
Dividend Income 600
(10% x total dividends of $6,000)
C. Investor’s Financial Statements
Balance Sheet:
LT Investment $250,000 at FMV
Income Statement:
Unrealized Holding G/L $30,000
Dividend Income $ 600